Consumption rebound lifts HUL net 28% in Q3

Fast moving consumer goods (FMCG) major Hindustan Unilever Ltd (HUL), which reported 28% increase in net profit at Rs 1,326 crore for the December quarter of fiscal 2018, said that the market conditions have got better and conditions are normalising across channels post the initial hiccups. However, with the input costs starting to move north, the company will have to keep a close watch on the same while maintaining its price advantage in the market.

Srinivas Phatak, chief financial officer, Hindustan Unilever Ltd (HUL), said, "In September, we'd said that post the initial turbulence, conditions had started to improve. From the December quarter, it's got better and now we are really seeing that the conditions are normalising across the channels.

"When we see it from a growth and demand point of view, there is a gradual improvement in demand and it's coming through in all our product categories. On the input cost front, we'd indicated an inflationary trend and that's really happening. Crude, which was sitting around $57 per barrel is now closer to $70. That's the context of the market today."

The maker of Surf, Lux, Dove and Lakme products registered a 17% growth in domestic consumer growth while the underlying growth stood at 11%. The company's earnings before interest, tax, depreciation and amortisation (ebitda) for the third quarter of current fiscal was up 110 basis points (bps).

"There are early signs of commodity cost inflation and we will further sharpen our focus on cost-effectiveness programs and manage our business dynamically for competitiveness and sustained profitability," said Harish Manwani, chairman, HUL in a media statement.

HUL has been generating (input costs) savings of between 6% and 7% of turnover in the past few years. "If the volumes come through, we get a leverage on the scale. We then use all the levers, all the lines of the P&L to see what is the best way whereby we can maintain the price value equation as well as keep investing behind the brands. That's the approach we follow. But be sure, we would always be price competitive in the market," Sanjiv Mehta, chief executive officer and managing director, HUL.

While the cost of goods sold was lower, the company stepped up its advertising and promotional spends to support innovations and market development activities on the back of a strong savings programme. Ebitda increased by 24% to Rs 1,680 crore. Profit after tax before exceptional items, PAT (bei) at Rs 1,198 crores was up by 30%.

On the issue of being slapped with a notice by the Directorate General of Safeguards (DGS) for allegedly not passing on price reduction benefit to consumers post the rollout of goods and services tax (GST), HUL said, effective November 15, 2017, GST rates in many categories were reduced for some categories from 28% to 18%. The company reduced the maximum retail price (MRP) and increased grammage for over 800 stock keeping units (SKUs) and the products with new pricing have already landed in the market.

While the implementation of this change was initiated immediately, HUL said, it was not possible to pass on the entire benefit of this rate reduction on some of the pipeline stocks during the transition. An estimated value of Rs 119 crore (Rs 60 crore for November + Rs 59 crore for December) was proactively disclosed to the Central Board of Excise and Customs (CBEC) on this count and we have offered to pay this amount suo motu to the government. This amount is not recognised as revenue and is accounted as a liability as on December 31, 2017, the company said in a statement.

The company has received the (DGS) notice but it doesn't give any details, said Mehta. "We have kept it (Rs 119 crore) as a provision in our balance sheet. We firmly believe that as a responsible company it is our duty to be transparent and what belongs to the consumer should go to the consumers. The CBEC has said that as per the legal provision, they will have to pass a necessary order for us to collect the money. As soon as we get an order/ details from the authorities, we will pass on the benefits to the consumers."

As of now, nearly 95% of HUL's products in the market is with new pricing. While the bulk has already gone out of the system, the company is expecting there will be some differential amount (for the balance 5% inventory in the market) and HUL will pay the same to the government.